To take a page from former Hartford resident Mark Twain, reports of hedge fund regulation in Connecticut have been greatly exaggerated.

News that the Nutmeg State – home to a large number of hedge funds – had set up a hedge fund unit within its Department of Banking sent a chill down the spine of many a manager. But according to the head of the unit, the reality of it is much more benign.

“Some people thought we created the unit so that we could specialize in doing exams and pick up where the [Securities and Exchange] Commission failed in the Goldstein case,” says an exasperated Ralph Lambiase, director of the department’s securities and business investments division. “That’s not the issue here. We’re not out there to do exams; we’re just trying to respond to public inquiries and concerns about market practices.”

The team was created by Lambiase eight months ago and includes individuals from the enforcement and examination divisions.

“Over the last eight months, there have been many more inquiries and comments about some of the market conduct and market practices surrounding the larger players in the industry,” he says. “So rather than being able to release them, I would up expanding it to six people.”

The group, which was designed to be in existence for only a short-time, is focused on responding to complaints from customers and allegations of wrongdoing in the press. One thing it is not charged with is regulating the industry. Lambiase assures that “it’s not the intention and it’s not the mission” of the unit to issue regulations. Nor, he says, is the department trying to circumvent the state legislature, which has twice rejected bills calling for greater oversight of hedge funds.

The unit “is in no way intended to circumvent anything,” Lambiase says. “This is people doing their job. That’s all it is. And if next week we start seeing problems in another area of securities, the state is obligated to shift the resources to where the problems are without unnecessary regulation.”

“We were doing market-timing cases two years ago. We shifted out of that. Now the issue is this. Hopefully, this unit is out of business in another six weeks, and they’ll have something else to do.”

The unit’s focus will be on smaller hedge funds, where Lambiase argues he is more likely to find “bottom-fishing for investors” without the means to invest in hedge funds, who Lambiase says do not belong in them.

“Our focus is staying in that lower tier and the questionable conduct you tend to pick up there. It’s not intended to disrupt by unnecessary regulation or examination the large funds,” he says. “When Amaranth [Advisors] just went down, the market absorbed the entire loss, without a bump. Do you really need us regulators in there? We don’t pick up much in an exam anyway.”

Above all, Lambiase says, the idea is to keep hedge funds’ good name out of the mud. “If we don’t keep this industry healthy, we are causing a problem for capital formation and risk management. We want to keep it healthy.”

“Hedge funds get blamed for everything under the sun. One of the things the hedge fund unit does is to ensure that they don’t prejudge anything.”

He adds, “We do not see a systemic problem with hedge funds in Connecticut.”

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